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Intuitions About Penalties and Compensation in the Context of Tort Law

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Intuitions About Penalties and Compensation in the Context of Tort Law Journal of Risk and Uncertainty, 7:17-33 (1993) © 1993 Kluwer Academic Publishers Intuitions about Penalties and Compensation in the Context of Tort Law JONATHAN BARON Department of Psychology, University of Pennsylvania, 3SI5 Walnut Street, Philadelphia, PA 19104-6196 I LAN A RITOV* Department of Industrial Enffncering and Management, Ben-Gurion University, P.O. Box 653, Beer Sheeva 84105, Isrnel Abstract Students, retired judges, economists, and others made judgments of appropriate penalties and compen,sation for hypothetical injuries. In some scenarios, compensation was paid by the government and penalties were paid to the government, so the two could differ. Penalties were generally uninfluenced by their deterrent effect on future behavior. Penalties were greater when they were paid directly to the victim than when they were paid to the government. Compensation was affected by whether injuries were caused by people or by nature, or by acts vs, omissions. These effects are not justified according to consequentialist views of penalties and compensation. We suggest that people are overgeneralizing reasonable rules and that such overgeneralization may be in- volved in perverse effects of tort law. Key words: tort law, penalties, compensations, intuitive judgments When one person (or group) harms another, people often think that the injurer should compensate the victim. Tort law can compel compensation. Such a transaction not only compensates the victim but also punishes the injurer. When the injurer compensates the victim, as when a child is induced to give back something she has taken or when a victim sues an injurer in court, punishment and compensation are linked together. Sometimes these functions are separated. Criminals are punished whether or not their victims are compensated. Insurance (private and social) provides compensation for misfortunes regardless of whether they are caused by people or nature, and regardless of whether the insurer collects from the injurer. In the studies described here, we sought to understand how people think about pun- ishment and compensation in the context of hypothetical cases in which people are killed or injured by birth-control pills or vaccines. These are typical situations in which lawsuits against companies occur. Some of our cases separated punishment and compensation, so that we could learn how people think about each function alone. *We thank David Houston, Robert Field, Rajeev Gowda, John C, Hershey, Jacqueline Meszaros, George Priest, and the anonymous reviewers for helpful suggestions, and Penny Pollister and Joanne Schwartz for research assistance. This work was supported by a grant from the National Science Foundation (SES-8809299), 18 JONATHAN BARON/ILANA RITOV It has been argued that the tort system sometimes leads systematically to undesirable results (e.g., Huber, 1988,1991). Rather than encouraging safety improvements or caus- ing harmful products to be withdrawn, tort penalties have caused highly beneficial prod- ucts—such as vaccines and birth-control products—to be withdrawn and have led to a reduction in research and development expenditures for similar products. For example, pertussis vaccine might cause brain damage or death in small numbers of children, although whooping cough, the disease it prevents, is far more dangerous. Production of this vaccine in the U,S, declined drastically as a result of lawsuits (David, 1986; Hinman, 1986; Huber, 1988; Inglehart, 1987), and the price increased, although the passage of a (partial) no-fault compensation law in 1986 may have reversed this trend (Hofmann, 1988). Likewise, research on new birth-control methods seems to have decreased for the same reason (Djerassi, 1989; Huber, 1988; Mastroianni, Donaldson and Kane, 1990), Viscusi and Moore (in press) present general evidence that liability costs tend to increase research and development expenditures up to a point and then cause a decline when the costs are sufficiently high. Although it is likely that some products should he withdrawn from the market, or not developed, because their harm exceeds their benefit, the examples cited by Viscusi and Moore, as well as those just cited, suggest that many successful lawsuits do not involve such harmful products. The motive of courts in these cases could have been to compensate victims, but U,S, society makes no comparable effort to compensate victims of natural disease for their misfortune. In this article, we suggest that undesirable results of the liability system could result in part from the intuitions of those involved in the system—judges, lawyers, plain- tiffs, defendants, and juries—about what penalties ought to be assessed and what com- pensation ought to be paid. In particular, two basic intuitive principles may be involved: the desire for retribution against an injurer, whatever the consequences; and the depen- dence of compensation judgments on judgments of human responsibility, so that com- pensation is considered more necessary when the injury is caused by a human act. These effects could be exacerbated by the usual linkage of compensation and penalties. Use of these intuitive principles, which are not based on expected consequences, could help to produce the kinds of undesirable outcomes that have led to complaints. Conceivably, the attempt to consider consequences directly might be self-defeating, and intuitive rules of this sort might yield better results in the long run. However, people who accept rules without understanding their consequentialist justifications can be in- duced to use rules that have no such justification. 1. Consequentialist accounts of penalties and compensation Consequentialism justifies penalties by their deterrent function, i.e., by the fact that they provide an incentive to do something other than what was penalized. Thus, a penalty with no beneficial deterrent effect is simply an unjustified wrong against the injurer, and "two wrongs don't make a right," Even if other factors are involved in determining penalties, we might expect deterrence considerations to affect their magnitude. INTUITIONS ABOUT PENALTIES AND COMPENSATION IN THE CONTEXT OF TORT LAW 19 Several scholars from the "law and economics" tradition (e.g., Brown, 1973; Landes and Posner, 1987; Shavell, 1987) have argued that deterrence provides the main justifi- cation of the common law of torts. Landes and Posner (1987) argue that common law has evolved to serve this function, despite the fact that many of its precepts seem nonintuitive to laypeople and the fact that the judges who made the law did not themselves under- stand the full economic rationale. Compensation can be given a consequentialist justification as a form of insurance, as when damaged property is replaced by an injurer or an insurance company (Calabresi, 1970). The loss increases the utility of money for the victim: if your car is stolen, you can use money more efiiciently to achieve your goals than you could before, e.g., you can buy a new car (Calfee and Rubin, in press; Friedman, 1982; Schwartz, 1988). It is irrelevant to this justification whether an injury is brought about by a negligent act, an innocent act, an omission, or a natural misfortune. (Compensation can also be justified as an incentive for victims to sue or complain.) Critics of the U.S. legal system maintain that those who sue successfully are well compensated, while others who sufi'er the same injury at the hands of nature (or the hands of a "shallow pocket") are left to fend for themselves, although the insurance justification is the same in both cases. 2. Psychological mechanisms We hypothesize that people make judgments of penalties and compensation on the basis of general intuitive rules, which often do produce the best consequences, but that people do not understand the consequentialist justifications of these rules (Baron, 1991, in press). As a result, people apply the rules to cases in which the justifications are absent. Previous studies (e.g.. Baron and Hershey, 1988; Ritov and Baron, 1990; Spranca, Minsk, and Baron, 1991) support these general claims. Two instances of the general hypothesis are examined: 1) people will not refer to the deterrence justification of punishment judgments on other principles, such as retribution; and 2) compensation judgments will be afi'ected by factors that afi'ect penalties but do not affect the insurance function of compensation; these factors include the negligence of the injurer and whether the injury was caused by an act, by an omission, or by nature. Retribution and deterrence are typically correlated. Through observation, people could come to think of punishment solely as retribution, without understanding that retribution is beneficial at least partly because of its correlation with deterrence. Their intuitive rule for the justification of punishment is, then, that it should depend on the magnitude of the harm and the intention behind it (Fincham and Jaspers, 1980), not on its deterrent efi'ect. When the correlation between deterrence and retribution is broken, they will stick with retribution. Other research suggests that many people do not take deterrence into account. Baron, Gowda, and Kunreuther (1993) have examined intuitions about deterrence in the con- text of hazardous waste, where compensation is not at issue. The subjects included 20 JONATHAN BARON/ILANA RITOV experts in hazardous waste legislation, retired judges, economists, members of environ- mental organizations, legislators, and officers of corporations. The questionnaire
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